How Pay-by-Bank Could Play Out in the US

Two things may change how banks and payment processors approach retail payments over the next few years: the spread of application programming interface (API)-enabled account verification and payment initiation, driven by market trends and regulatory requirements formalizing open banking, and instant payments, driven by financial institutions’ (FIs’) rapid adoption of FedNow. With the broad availability of both, account-to-account (A2A) payments could become convenient and fast enough to compete head-to-head with cards as a payment method accepted by FIs’ business customers and payment processors’ clients.

The status quo for retail payments includes A2A payments dominated by automated clearing house (ACH) transactions for certain transaction types, and debit and credit cards for day-to-day payments. ACH transfers, which can take several days to settle, are appropriate when cost is a priority over speed. That’s generally the case for billers paid periodically, though they can be clunky to set up. Meanwhile, cards typically are costly to accept but are seamless for customers to use. Open banking and instant payments address both experience and cost issues: API-enabled account verification simplifies setup for A2A payments, while instant payments eliminate settlement time, increasing liquidity for billers and merchants, at a low cost per transaction.

FIs’ and payment processors’ approaches to retail payments appear positioned to evolve with these new capabilities to make A2A payments a more attractive option for billers and merchants. For now, most activity is related to using API-enabled bank verification for ACH payment initiation. At least one bank has shown evidence of it: JPMorgan, in partnership with Mastercard, recently went live with a solution that Verizon is taking on a test drive. According to JPMorgan, the service eases how consumers set up A2A payments for expenses such as rent, utilities, insurance, healthcare, and tuition, while helping billers manage fraud and time their cash flows.

Payment processors and other infrastructure providers are also working on it. Plaid, for example, offers an API that retrieves account numbers and routing information for payment initiation, originally for ACH and recently also for FedNow. Consumers who have opened accounts with neobanks or connected their bank account to a fintech app are likely familiar with this kind of interface and primed to use it in other settings. Such familiarity and the ability to easily set up A2A connections could make this option as or more seamless than using a credit card. With other incentives, such as rewards, consumers may be more likely to choose A2A when they have a choice. In a merchant’s checkout flow, this might look like a bank authentication step instead of a form field for a credit card. Over time, we’re likely to see more use cases emerge as instant payments grow more prevalent, pushing payees to see greater value in A2A options.

Ultimately, real-time A2A payments will likely unfold slowly as a viable alternative to cards. The high speed and low cost should be attractive to billers and merchants, and consumers should be attracted to an easy-to-use interface. But there’s a chicken-and-egg issue related to availability and acceptance that will take effort to kickstart. The US offers hints of how the A2A trend will play out and what FIs or payment processors will do about it: The JPMorgan example above shows a bank tiptoeing into the use of API-based account verification with bill pay. The UK, with mature open banking and real-time payments systems, gives better indications for payments to merchants, with fintechs building “pay-by-bank” into checkout flows with authentication and rewards, and integrated on the back end with risk management and reporting.